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Accept Special Sales Order

AAA Lock Manufacturing Co. makes and sells several models of locks. The cost records for the ZForce lock shows that manufacturing costs total $29.00 per lock. An analysis of this amount indicates that $16.75 of the total cost has a variable cost behavior pattern, and the remainder is an allocation of fixed manufacturing overhead. The normal selling price of this model is $38.75 per lock. A chain store has offered to buy 15,000 ZForce locks from AAA Lock at a price of $20.00 each to sell in a market that would not compete with AAA Lock's regular business. AAA Lock has manufacturing capacity available and could make these locks without incurring additional fixed manufacturing overhead.

Required:

a) Calculate the effect on AAA Lock's operating income of accepting the order from the chain store.

b) If AAA Lock's costs had not been classified by cost behavior pattern, is it likely that a correct special order analysis would have been made? Explain your answer.

c) Identify the key qualitative factors that AAA Lock managers should consider with respect to this special order decision.

Solution Summary

This solution includes required calculations for the increase in operating income. Explanation for cost behavior effects and key qualitative factors to be considered are also discussed.

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